IFR Asia: Mitsuhiro-san, going back to 2010 when CGIF was established, what were the weaknesses you identified in the Asian local currency bond market that led to the creation of CGIF, and what role does it play today?
Mitsuhiro Yamawaki, CGIF: Let me first explain who we are, what we do and why CGIF was established. Credit Guarantee and Investment Facility (CGIF), is a trust fund of the Asian Development Bank (ADB) established as part of the Asian Bond Market Initiative (ABMI). Both ABMI and CGIF are owned and promoted by the ASEAN 10 countries, the ADB, and three additional countries: China, Japan and Korea.
Recalling the bitter lessons of the Asian financial crisis in the late 90s; at that time, long-term local currency debt markets in ASEAN had not been developed enough. It meant that most public and private sector companies borrowed heavily in hard currency. They accumulated a substantial amount of external debt, but generated cashflow only in their home currencies.
There was a huge currency mismatch between borrowing and revenue generation.
In the late ‘90s, there was a huge and sudden depreciation of local currencies against the US dollar and other hard currencies, and that created huge problems.
The ABMI was started to respond to the financial crisis.
Now, CGIF was established in 2010 as a guarantee entity. Our mandate is to provide credit guarantees to local currency bond issuers in ASEAN countries, because most issuers in Asia have standalone ratings short of the risk appetite of institutional investors.
By filling the credit gap, qualified bond issuers can tap local currencies, thereby avoiding any currency mismatch between borrowings and revenue.
IFR Asia: You see plenty of CGIF-guaranteed bonds in all kinds of currencies. There’s quite a spectrum of deals there. Anuj, how have the Asian bond markets deepened in recent years?
Anuj Awasthi, CGIF: Quite a lot.
One unique thing about us is we only operate in local currency markets in Asia. There’s nobody as focused as we are in terms of being a single product set-up.
We’ve seen the growth of the local currency markets. We’ve seen demand from investors in local currency growing. It’s not just that we’ve seen issuers wanting more local currency solutions through the years.
What has been fascinating to watch is that, as the economies have grown, the investible surpluses in local currencies have increased. That has also supported growth of the local currency market. Across all the markets we are active in, we only see demand for local currency products continuing to grow.
We run a portfolio of about US$2bn. We’ve provided guarantees of close to US$3bn, which is no small amount given we only do local currency. We expect that to grow substantially in the future.
IFR Asia: Murali, how have you seen the Asian local currency markets deepen in recent years?
Muralidharan Ramakrishnan, Fitch: Local currency markets in Thailand and Malaysia have been relatively deep compared to most emerging markets. They’ve still grown, both in terms of the size of issuance and bonds percentage of GDP to the country.
More interesting is how some of the smaller markets have grown. For markets like Vietnam, their volumes have more than quadrupled over the last decade or so. But it’s not just about markets growing in size, it’s also about how the structure of the market has also changed.
Vietnam is still a largely government securities (GSecs) market, but if you look at the debt maturity profile of the Gsec issuance itself, that has extended. In 2014/2015, most issuances used to have tenor of three to five years, but over the last three or four years, tenors of most bonds have moved beyond five years to 10 years and even longer.
The other interesting development in is the growth of the corporate bond market in markets like China, Thailand, and India.
In markets like Thailand and India, we have seen the number of small issuers growing. Some statistics show small issuers comprise about 30% of total volume – that’s issuers with less than Rs100m (US$1.2m) in India, and of a comparable size in Thailand as well.
We’ve seen the market moving across the credit spectrum as well.
Local currency bond markets are still not deep – larger issuers still make up about 95% of the market, but we’ve made a start.
Further, ESG-related and other bond structures are picking up pace as well.
Anuj Awasthi, CGIF: Something fascinating has happened in ASEAN over the last 10 years. Some small markets, like Cambodia, have higher volumes of corporate bonds than government bonds. It shows that the governments are working actively to encourage bond issuance in the region.
That’s a particularly good sign.
IFR Asia: Sean, you can advise companies on G3 or local currency. Are there any Asian local currency markets deep enough to really compete with what you can achieve in G3 currencies?
Sean Henderson, HSBC: It’s worth looking at the local markets as a collective, and then considering individual currencies, because you get a quite different picture from these two perspectives.
In the last 12 months, Asia ex-Japan G3 issuance has fallen by around 40%, while local currency markets volumes have grown by 32%, so I think it’s clear the local markets are providing issuers with a competitive alternative source of funding as US$ rates have risen.
This growth in local currency markets also makes sense if you consider how regional GDP has grown, and how high saving rates in Asia have driven wealth accumulation. This increase in wealth has seen many local currency markets deepen and mature substantially, with the region now largely able to finance growth from within rather than needing to import capital, which is a very different position to 20 years ago.
To put this into context, over the last 12 months, HSBC has arranged 76 deals in Asia ex-Japan G3, raising US$12.5bn. In Asian local currencies however, we arranged 385 deals, raising US$20.7bn over the same period – and that sort of volume is excluding the onshore China RMB market, which is significantly larger than most other in the region. In short, local markets are more than able to compete with G3 in terms of scale and pricing for most regional borrowers.
We’re also very supportive of local currency markets for another reason, in they help mitigate foreign currency risk. Raising capital in your home currency, particularly in countries where the swap markets are less developed, can often be the lower risk and more stable source of financing.
The challenges become a bit more apparent however when you start to look at individual markets. Some currencies are very open to cross-border issuances, such as Singapore dollar and Hong Kong dollar, but many are not. Many regional currencies still have complex local regulatory environments, local documentation requirements, and most have restrictions on the moving of funds cross border. Those markets may therefore still be incredibly important for domestic issuers, but they are challenging to access for other issuers within the region, and they don’t allow for the intra-Asia flow of savings and investments. That’s where G3 markets can still provide significant value, as they are open to all issuers.
It’s also worth noting that many local currencies struggle with jumbo deal sizes. If an issuer wants to issue a sizeable volume to fund a large cross-border M&A transaction for example, then it can be hard to do this in local markets – even many of the larger regional currency markets still have capacity issues on individual tranches.
But there are also other challenges to be addressed, for example the appetite for corporate credit. Some markets are relatively mature in this regard, but many others still have work to do in developing a strong culture of investing in the private sector and in corporate credits. Second or third tier companies in these countries might be forced to the G3 markets to be able to access fixed income capital.
In summary, we see both the G3 and local currency markets as important for the region, and it’s more a case of which makes the most sense for each issuer or specific financing requirement. There’s no question Asian local currency markets are very important to the region though and are only going to get more so as regional savings continue to grow.
IFR Asia: Jerome, looking at things from the buy side, where are the deep and liquid markets for you in Asia?
Jerome Tay, Abrdn: Ex-Japan, China is one of the largest markets with outstanding of around US$20trn. Then it’s Korea and India with around US$1trn outstanding.
Having said that, if you look at the sizes from their respective level of onshore demand, the liquidity in Asia markets is quite deep. For instance, the Singapore dollar bond market is around US$500bn in size but non-banking customer deposits have grown to outpace that size at around US$800bn. Hence liquidity will only become deeper in the future.
IFR Asia: Hiro-san, how do you decide who gets a CGIF guarantee?
Mitsuhiro Yamawaki, CGIF: We approach it from three angles. The first one is in relation to our policy mandate – where transactions conform to what we are trying to achieve in the marketplace. The second is in relation to our uniqueness as an ADB trust fund. There are certain restrictions related to the nature of our entity. The third is the credit risk perspective – which is nothing different from any financial institution when taking credit risk.
Let me elaborate.
First, policy mandate. We’re trying to minimise a borrower’s currency mismatch, so we look at the proposed use of proceeds of the bond issuer to make sure there is no mismatch. Launching a local currency deal, that’s a particularly important criterion – we are here to develop the local bond capital markets in ASEAN.
We’d like to extend the tenor of existing bond issuers and we’d like to promote certain thematic bonds, such as green bonds, social bonds, and sustainability-linked bonds. We are here to create something new, something innovative in the marketplace.
We are also keen to promote specialised bonds such as project bonds or securitisation bonds.
The second one: CGIF is a trust fund of the ADB, so the eligible issuers are from ASEAN. That’s a restriction. We have a minimum rating criteria, which is Double B-minus, except for issuers from countries like Laos, Myanmar and Cambodia, because those three countries are rated Single B.
We look at the standalone credit, the standalone soundness of issuers. Also, we make sure that issuers are compliant with ADB’s safeguard and integrity policy standards and requirements.
The third one: credit risk perspectives. We like to make sure that the issuer is mature enough to tap a bond capital market. So, even if their standalone rating reaches the Double B-minus criteria, we want to ensure that an issuer’s future projected cashflows are sound enough to support the sustainable operations of the company.
We also like to make sure that the issuer has sound and reliable banking relationships, because CGIF as a bond guarantor cannot substitute for the services and growth created by the relationship banks. Maintenance of a stable and sound banking relationship is the backbone for any issuer tapping the bond markets.
IFR Asia: Have any of those issuers you’ve guaranteed gone on to do standalone deals? Is that a sign that it’s working?
Anuj Awasthi, CGIF: Yes, we love it when that happens. That’s what we’ve been set up to do. So, we get extremely excited when we see issuers that we’ve supported mature to the point that they can issue a bond on their own. One example would be the Astra Group in Indonesia. It issued an overseas bond for the first time, a S$100m (US$75m) deal for which HSBC was one of the leads, and then followed that up by issuing S$300m on their own.
We’ve had multiple cases like that in Thailand.
We supported Vingroup with the first long-term bond they issued in local currency Vietnam in local currency, a 10-year specifically targeted to insurance companies in Vietnam. Now, Vingroup is a regular issuer on its own. The same for Masan.
One success factor for us is that we want issuers to become familiar with the entire capital market’s ecosystem.
When we first did the deal in Vietnam, the investors who we were targeting were completely against investing in corporate bonds, because their mandates didn’t allow. Now investors in Vietnam say, “Why a guarantee? I can take the risk on my own.”
That’s an enormous success for us.
IFR Asia: Sean, what have you seen driving the trend for cross-border local currency issuance within Asia?
Sean Henderson, HSBC: There are some currencies more open to cross-border issuance, and some less so, but generally speaking, you can put the attraction of the local markets down to a few factors. The first of which is interest rates.
Going back a few years, most local currency markets had much higher interest rates than US dollars, but that reversed substantially in 2020. It’s no surprise therefore that more issuers have gone to domestic markets, for example especially for Chinese issuers who have been much more active onshore as US dollar rates have risen above renminbi rates.
Lower rates in RMB has also triggered some cross-border issuance the other way. For example, the debut Panda deal we led for VW was a huge success in terms of participation and pricing outcomes.
The second driver has been improved risk appetite. As the local currency markets have grown, investor sophistication and appetite for corporate credit has improved. In the Indonesian market, for example, we now see a lot more domestic corporate bonds than we ever used to.
We’ve also done a large amount of Indian rupee issuance this year for our corporate clients. India has been an exciting theme in the region, and we’ve seen the likes of the renewables and infrastructure sectors gaining significant scale and starting to borrow very successfully in INR.
Funding locally to avoiding cross-border payments or cross-currency swaps is another factor. If you’ve got clients with local or regional Asian revenues, then tapping local currencies can help them match-fund their business profile, and lower cross-currency risks.
From a pricing perspective, certain markets can present specific opportunities for structural reasons. In Hong Kong dollars, for example, there’s a bid for longer dated investments from insurance companies. Sometimes they’re prepared to buy on a private placement basis at an attractive yield for issuers on a swapped basis. Likewise, the Singapore dollar market is particularly well-known for its high-net-worth investors that makes the market very efficient for hybrid capital instruments, for example Tier 2 capital. Each local market tends to have different dynamics in terms of preferences for structure and tenors, which can deliver opportunities for issuers prepared to look cross-border.
The final piece is ratings. When a client goes to the domestic markets, for example in Thailand or Malaysia, they don’t need to have an international rating. A domestic rating might also give them a better outcome, and this can be a factor, particularly if their international rating outcome might be in the high-yield category.
IFR Asia: Murali, what kind of trends have you seen for Asia to other Asia issuance?
Muralidharan Ramakrishnan, Fitch: One market that stands out is Thai baht. We have seen the Thai baht market supporting issuers from Cambodia, Laos, Vietnam and Myanmar.
That trend is driven by the structure of the market and how the regulations have been framed. Post the financial crisis, the regulators enacted new regulation whereby if an entity is raising funds in Thai baht, the proceeds cannot be moved offshore – except for these four countries.
One other advantage for issuers from these four countries is that they don’t need an international rating. Getting a national rating also helps reduce costs.
IFR Asia: CGIF has guaranteed some issues from Asian companies issuing in other Asian currencies. What’s the rationale?
Mitsuhiro Yamawaki, CGIF: Cross-border local currency bond issuance is something we have been promoting quite strongly, because CGIF is an ABMI ASEAN initiative to promote the integration of regional economies.
Supporting local-currency cross-border issuers in ASEAN is perfectly in line with this regional economic integration effort.
Let me introduce a couple of transactions by way of example.
Hope Education Group, a developer of universities in China, started investing in new universities in Malaysia and Thailand. To support investment in these countries, CGIF issued a guarantee for their issuance in Thai baht and Malaysian ringgit.
Another example is Hanwha Solutions from Korea, which specialises in the manufacturing of solar panels. The company has existing manufacturing facilities in the China and Malaysia. We helped them issue bonds in offshore yuan and Malaysian ringgit to help them recapitalise existing debt and cap the equity structure.
Anuj Awasthi, CGIF: Just to add, I think regional cross-border transactions will increase. Certain regulators like it, certain regulators don’t.
Around the time of the global financial crisis, Malaysia was one of the most open markets but now it is not as open to investors. Thailand, on the other hand, which was quite closed, is now open – not only for issuers from the Greater Mekong region, but also for issuers from countries like Malaysia and Indonesia. You’d be surprised by the size of deal you can achieve there.
The investible surpluses of just the largest asset manager in Thailand is about US$41bn, for instance. That’s the kind of liquidity that has developed over the last 10 or 15 years in these markets.
IFR Asia: It’s not just Asian issuers in Asian local currencies. There’s also quite a trend of international issuers coming to Asian local currencies. What’s driving that?
Sean Henderson, HSBC: I’d put the international issuance into two buckets.
One source of issuance is from large multinationals with significant businesses in the region – VW would be an example of this – and these issuers will often leave the funds in the region to finance their local operations and growth.
The second bucket would be opportunistic issuers looking at Asia to diversify their investor base or achieve better pricing outcomes as part of their global funding plans. One of the best ways for these issuers to tap liquidity in the region is to do a deal in a local currency. Pricing is an important factor for these names though, and we do see a pickup in issuance when the basis swap is in their favour. The euro currency basis swap to Singapore dollars has been very favourable this year for example, which explains why a few European banks have tapped this market.
Scale can also be a factor for issuers too, as local currency markets can be very useful if you only want to issuer a modest transaction size. The SGD market for example can allow for deal sizes as small as S$50m–$100m but can also accommodate deal sizes of up to S$1bn or more, so it’s quite flexible relative to US dollar or euro markets which typically insist on benchmark sizes.
IFR Asia: From the buyside perspective, what are the challenges for international investors looking at Asian local currency markets?
Jerome Tay, Abrdn: The three key idiosyncratic challenges to local currency bonds are valuation, market inefficiency and liquidity.
Valuation: if you look at dollar denominated bonds, investors tend to value them against the US Treasury curve (the risk-free rate) where they take a view on duration and add a credit risk premium to the valuation.
With a local currency bond, you must look at the respective country government’s risk-free curve (i.e. different monetary policies), credit risk premium and then overlay with additional assessment on FX risk premium.
Most of us will agree that looking at credit risk premium alone is a lot of work. So, in comparison to different government bonds – the macro perspective – on top of the FX risk, the expertise required is very different.
Secondly, it’s liquidity. If it’s a dollar denominated bond, you can see big deals – US$250m to US$750m in size, but if it’s local currency then it’s significantly smaller. A S$100m to S$200m corporate bond deal is relatively sizeable to begin with.
Finally, market inefficiencies. In some parts of the region there are restrictions on currency settlement, such as in India and Korea.
IFR Asia: How do Asian local currency bonds look when compared to hard currency in terms of relative value?
Jerome Tay, Abrdn: This is probably the main reason most issuers are issuing in local currency. If you look at US dollar denominated bonds, the curve is inverted. In a market landscape like today, most investors will prefer duration as tightening monetary policies are maturing.
Most local currency curves have normalised and are steeper than in the US. That’s one of the key reasons why investors have been increasing allocation from dollar-denominated bonds to local currency bonds if they want duration.
Additionally, fundamentals in Asia are currently diverging in a good way relative to other regions. Many Asian economies are already having their inflation returning below or within their respective target range resulting in much more attractive real yields. Moreover, investors are also seeing the fruits from more prudent fiscal policies in this region since the pandemic.
Most importantly, hedging costs are also cheaper now and some Asian FX forwards are providing additional carry due to its negative implied cost. If you were to buy a Singapore dollar bond and hedge it back to US dollars via FX forwards, you will be able to get about close to 1% annualised pick-up via a six-month forward.
It’s a good opportunity for us as investors.
Sean Henderson, HSBC: From an issuer perspective, local currencies are very competitive and can often price inside of US dollars, but it’s more often a question of market access for our clients. The major factors determining the market of issuance are often still regulatory and documentation requirements, cross-border restrictions, availability of cross-currency swaps, and the available market depth and appetite for corporate credits.
IFR Asia: How has the investor base developed?
Anuj Awasthi, CGIF: When we first started, all the bonds CGIF guaranteed used to be single investor deals. The one exception was Vietnam, where we had a local set of investors – largely insurance companies, which were collecting a lot of surpluses as the economy was growing and they could invest in local currency.
As the years progressed, we said, “This is not good.”
We’ve consciously tried to develop an investor ecosystem. We really want our bonds to go to local investors. We want to channel local savings into the local capital markets.
Each market has a distinct set of investors, which may determine the extent of demand at some points on the curve, but what has been really encouraging over the years is that we’ve seen local asset managers, insurance companies, and banks all taking part in deals that we’ve supported. It will only increase.
We know the banks support us as investors, but I really think, and don’t mind my saying so to the buyside, I think the buyside still doesn’t understand the PD (probability of default) versus LGD (loss given default) issue. They have difficulty appraising a guaranteed bond with a standalone credit.
That’s a challenge for us. That’s something we are going to keep working on, because once we’re able to achieve that, then CGIF will be able to establish a curve which is very easy to understand.
We are very keen that the domestic investor base widens. Although we don’t mind overseas investors coming into our deals, we firmly tell banks that when an issuance is supported by CGIF, a certain minimum percentage must be placed with onshore investors. That’s something we’ll keep doing.
IFR Asia: Has the Hong Kong Bond Connect had any impact on driving cross-border demand for renminbi bonds?
Sean Henderson, HSBC: The overall trend has been for Asian currencies to become more open over time, and that’s been a positive. It might take more time to get there, but ultimately, we’d like to be able to facilitate a lot more Asian issuers tapping cross-border liquidity from within the region.
Bond Connect is a very positive development in that context. Before Bond Connect, the onshore and offshore markets could sometimes be driven by different technical dynamics, but Bond Connect has opened the opportunity for investors operate across both, helping the two markets align better and both operate more efficiently. We are also very keen to support international participation in the onshore RMB market, which we see as a positive thing and a trend that’s only likely to increase further.
One more point on the local currency investor base. Some 15 or 20 years ago, you might have had a significant portion of the investor base made up of large global funds running Asian local currency strategies. Now, the predominant investor base is local, investing domestic savings, which has increased the stability of these markets in more challenging times.
IFR Asia: Another driver that may affect international interest is index inclusion. How has that affected markets in India or Korea, where they have been focused on index inclusion?
Jerome Tay, Abrdn: If we talk about India’s inclusion into the JP Morgan Government Bond Index-Emerging Markets, which is around US$200bn in size, the weight given to India is around 10%. That means around US$20bn–$25bn of passive flows flowing into the market by the end of next year assuming that these funds will be market neutral on their allocation rate.
But you take a step back and look at why indexes are constantly adding new countries, it’s because index providers want to improve the overall quality of the index itself.
While the EM space is complicated, Asia has been getting higher weightage within the index over the years. If we look at a country like India, fundamentals and inflation are improving alongside lower correlation to global volatility.
Interestingly, post India’s index inclusion, we are already seeing strong interest in our India onshore bond fund from non-index tracking investors globally due to the reasons mentioned.
Overall, the announcement of index inclusion will not be “an end”. We expect continuous growth of Asia’s weightage within indexes moving forward.
Lastly, the inclusion of India will also start encouraging other indexers like the Bloomberg Global Aggregate Bond Index to start including India into its index, alongside higher allocation from other global investors who are not tracking these indices.
IFR Asia: A few years ago, CGIF guaranteed a Vietnamese dong project bond. Given the improvements we’ve discussed, are we at the stage where project bonds in Asian local currencies have become more viable?
Anuj Awasthi, CGIF: There are certain markets in which project bonds are very active. Look at Malaysia where a 30-year project bond is easy to do. It’s similar in Thailand.
We thought Vietnam would be a good market for project bonds, but volatility in the Vietnam bond markets has not only affected project bonds but the general Vietnam ecosystem as well. It will take a while to sort out but we’re nearing the end of that period right now, and we are very keen to look at project bonds again.
In markets like Indonesia, where a lot of infrastructure financing still goes through the banks, we see project bonds as an opportunity. It’s the same elsewhere.
In fact, about three years ago CGIF commissioned a study from KPMG to analyse the viability of the project bond market in the region. The infrastructure needs of the region are huge. How we can assist in financing it is a challenge for institutions like us. We want to see how – if not project bonds, but increasingly infrastructure bonds – the market could be supported by multilateral development banks in general.
Over time, markets like Vietnam, Indonesia, and the Philippines, where there’s a lot of investment going on, will catch up with the already-developed markets of Malaysia or Thailand.
In markets like India and China, project bonds are completely non-existent. It’s all loans.
Sean Henderson, HSBC: There are a few things you need for a true project bond to work. You need to have a high degree of risk analysis, unless you’re relying on a guarantee structure if course. If you’re taking on non-recourse project risk, you really need to understand the project cashflows, the stability of the sector, the legal and contractual frameworks, etc. It can get very technical, and this requires a more sophisticated investor base.
In addition, you typically need a longer dated investor base able to invest directly in projects, otherwise borrowers will typically just go back to the loan markets who already know the projects well. That tends to require a deep pool of asset management or insurance capital that’s looking for long-dated infrastructure assets.
That’s why Malaysia works particularly well in project bonds, because it has got both of those elements.
One of the major challenges that still exists in some of the other less developed regional currencies is that a lot of the projects are structured for relationship-based lending, and so they lack the strong contractual frameworks to appeal to institutional money. The quality of the offtake agreements, stability of cashflows, and risk mitigants aren’t always structured for institutional demand, and while that may work in the construction phase, it can make it difficult to refinance with institutional investors, and I think that’s something that regional markets could look at more closely.
Muralidharan Ramakrishnan, Fitch: You need to be a strong credit to attract long-term investors, like insurance and pension funds as investments are capped at Double or Single A across most markets in the region. Projects, especially newly commissioned or under-construction, are typically rated much lower than these levels.
IFR Asia: How is sustainable finance feeding through into Asian local currency bond issuance?
Muralidharan Ramakrishnan, Fitch: There has been significant development on the ESG front.
For any bond market to work, the need for right regulations and clarity around implementation is key. That’s where we’ve seen some markets doing much better than others.
China came out with their ESG taxonomy and law in 2021, and we’ve seen a big jump in issuance there. We have seen very similar trends in Thailand.
Governments in the region are working on green taxonomies, which I think will be key for investors and the further growth of the ESG market.
One of the biggest concerns for both onshore and offshore investors is greenwashing. Having clear regulation in terms of what qualifies as green/sustainable bonds and what doesn’t will be key. Regulations are under various stages of development throughout the region.
Thailand has already come out with its draft. India is still at the developing stage. There’s also ongoing efforts to develop an ASEAN green taxonomy. That will help significantly, as it will synchronise regulations at the regional level and easing compliance for both issuers and investors.
ESG bond issuance have increased, but there’s a lot more to come, especially with the introduction of green taxonomies.
Sean Henderson, HSBC: On the ESG side, we face different challenges depending on the nature of the instrument.
If you’re talking about a use of proceeds-based instrument, it’s typically much easier, as you can align to a taxonomy and say, “The funds are going to this activity, this activity is green under a particular taxonomy, and so we’re issuing a green bond”, no problem.
The challenge comes from areas of the economy which aren’t clearly labelled as green but can be just as important to the transition. For example, in the property sector there’s often a clear reference to what constitutes a green property, with independent certifications from LEED (Leadership in Energy and Environmental Design) or BREEAM (Building Research Establishment Environmental Assessment Method), etc, available, so we can use these as benchmarks, but for most other sectors, it’s hard to quantify and get agreement what good looks like. That can be a very subjective question dependant on each individual issuer and their own local context, so it’s often not a question of whether an activity is green or not, but more how good is good enough, and what benchmarks should they be aligning to? It’s a much more subjective measure and that’s where the greenwashing question comes in.
To give you an example of the challenge, if you add up all the current national commitments under COP26, we won’t hit 1.5 or even 2 degrees. We’re probably talking about 3 or 3.5 degrees. So, if an issuer says, “I’m aligned to my national commitments, therefore my KPIs should allow me to issue a labelled bond,” it won’t always add up.
Solving for labelled finance in green sectors is one thing, but we need to figure out how to benchmark transition pathways in more challenging sectors such as industrials, manufacturing, power and utilities, and all the other sectors that need to decarbonise.
IFR Asia: How is CGIF trying to incorporate ESG considerations into its own issues?
Mitsuhiro Yamawaki, CGIF: As a trust fund of ADB, we adopt and apply ADB policies in scrutinising guarantee opportunities. We are looking for the highest standard in terms of integrity in all our activities and these might be viewed by issuers as too burdensome, too vigorous, or too costly.
But eventually, by way of working with us in implementing the highest industry standard, a company’s enterprise profile will be improved substantially. Corporate risk culture in relation to safeguard and integrity will be much enhanced, and this will lead to stronger diligence and mutual trust between issuers and the investors. In the long run, this rigour will be beneficial to issuers in the region.
We conduct comprehensive environmental safeguard due diligence and, based upon those findings, we are implementing the ESMS (Environmental Safeguard Management System) in the issues. Either tied to specific projects or on the corporate level.
Some companies have ESMS, but not at the level we need, so we’re working with clients to enhance their existing ESMS to a higher level. This will not affect their specific bond issues but will certainly improve the enterprise-wide activities going forward.
In the short-run, this might be viewed as burdensome but, in the long-run, it will create a more sustainable and sound corporate culture. In turn, that will eventually lead to more investor confidence in bond issuers.
IFR Asia: What would CGIF like to see as the next steps? What would you like to be able to do in the future?
Anuj Awasthi, CGIF: We know our markets quite well and we know where we stand in the market. As an organisation, we’ve been largely focused on getting more issuers into the market. But over the last two years we’ve been changing the conversation to become equally focused towards the investor side, because we know that even if you have a perfectly structured bond, if there are no buyers, it’s going to fail.
Surprisingly, when people talk about ASEAN as a region or Asia as a region, we think markets like Malaysia and Thailand are more developed in the capital market space than even markets like Singapore or Hong Kong. The normal perception would be that Hong Kong and Singapore are more developed, but that view is skewed by the ability of those markets to accommodate large deals.
But when you go down the credit curve, you see Thailand and Malaysia are more advanced than Hong Kong dollars or Singapore dollars, or even Japan for that matter. That’s the dichotomy. We’re trying to connect the best practices across the entire ecosystem, across the region.
From our point of view, we also believe that benchmark sizes need to be created in local currencies. Our capacity is huge. Our single borrower limit, or a single exposure limit, is higher than even the largest foreign banks in the region. We can take risk of US$220m, so we are going to be out there in the market telling people that we can guarantee a S$300m deal alone. Nobody else can do that.
That’s something we want to do, because that creates a benchmark, which creates acceptance in the market. We also believe that in the next two or three years you will see a trend towards issuers from markets like Indonesia, which have previously relied on G3 funding, starting to ask for local currency solutions.
That’s something we would like to tap into in size. It’s a wonderful opportunity for us to get the onshore capital market ecosystem going, creating benchmarks for ourselves, for benchmark issuances to be done in each of these markets.
We’re an organisation that has been set up to get the capital market ecosystem going. The sad part for us as employers is that once that gets going, we have nothing to do. So, we die if it succeeds.
We are happy about that because one question you asked me at the beginning was, “Have companies raised issues on their own?” and we love it when that happens.
We are an organisation that is willing to die for the sake of the capital market’s growth and that’s something we would be willing to push the envelope for.
We are innovative. We can look at multiple products. When we say, ‘Capital markets,’ it could mean anything. We are extremely excited when a bank or a financial arranger tells us, “This has been done in London. Why can’t you do it in Asia?” We would love to have that conversation.
Those are things that excite us. We think there’s a lot of potential in Asia. We’d like to see if we can keep pushing the envelope.
IFR Asia: Is there anything that governments or regulators can do to deepen and improve the Asian local currency markets?
Muralidharan Ramakrishnan, Fitch: The obvious answer is ‘yes.’
For a bond market to work, we need strong macro conditions and strong regulations. That’s where the government and policymakers’ roles become important.
We’ve seen some developments taking place, especially in markets that have been relatively weak compared to regional peers – like India, Indonesia. If you look at the way these markets have developed over the last five years, it has been largely driven by private placements where disclosure levels generally are relatively weak. And secondary trades, done privately, don’t get reported.
Those basic issues have been addressed.
You need secondary market liquidity for the bond market to develop and we are seeing various initiatives being implemented around this topic.
There’s a lot more to come on the various points we’ve touched upon, including deepening the credit curve, and regulations around foreign participation.
Sean Henderson, HSBC: You shouldn’t underestimate the importance of stimulating development of the institutional investor base, and ensuring savings are channelled through professional investors. One of the reasons that Thailand and Malaysia markets are so successful is because they have deep pockets of asset management and insurance capital. When savings are channelled through these sorts of institutional investors, you can build a strong culture of investing in longer dated assets, as well as a deep understanding of corporate credit risk.
If your savings are mostly flowing through retail investor channels and into direct investments, then unless those investors are particularly sophisticated, you face challenges in terms of the understanding of risk, and you can potentially run into problems.
Likewise, if savings are sitting mostly in the banks, then you run the risk of procyclicality. If banks are the biggest buyers of bonds, then if there’s ever a banking crisis, then the bond market will be impacted too, which is not what you want to achieve. You want a bond market to be deep and functioning alternative source of liquidity to the loans market when the bank marketing market is facing challenges. Banks also tend to skew the bond markets to shorter tenors, which is another factor in increasing systemic risk.
So, one of the first things I’d suggest to regional regulators is, “Stimulate the development of the asset management and the insurance sectors, and then help drive a solid understanding of bonds and corporate credit risk within those institutions.” That’s what will really help develop the local markets even further and take them to the next level.
Muralidharan Ramakrishnan, Fitch: One more point is the cost of issuance. That’s something that affects smaller issuers and keeps them away from the bond market – it’s much easier for them to work with banks to meet their fundraising.
We have seen regulators addressing that issue, with Thailand a good example. They have given incentives to borrowers to issue bonds reducing initial issuance cost for small issuers.
IFR Asia: What would you like to see to encourage investor interest in Asian local currency markets?
Jerome Tay, Abrdn: I think issuers as well as DCM professionals have a huge part to play to provide more high-quality local currency bonds for investors. For instance, in Indonesia, the government debt market alone has doubled to around Rp5,500trn (US$355bn) since the pandemic. With 85% of these bonds being held by onshore investors, a large amount of coupons paid out annually can be reinvested and recycled back into the Indonesia local currency debt market. Such strong onshore demand will remain a trend over the next two or three years to keep Asian local currency markets stable.
In terms of regulators, one thing is easing the barrier of entry to access. For certain restricted countries like India and Korea, investors need to create an onshore account which requires multiple approvals before access is granted. Not only that, standardising and simplifying tax regulations will also be a huge plus.
Finally, if you look at countries like UAE, where the federal government of the UAE does not need to issue any debt to fund any form of deficit, they are already issuing bonds to develop a risk-free curve to provide a benchmark for corporate issuance. Singapore is another example.
Some parts of developing Asia are however still lacking in such development. So it will certainly encourage investor interest if liquidity improves in those parts of developing economies.
Anuj Awasthi, CGIF: We talk to regulators regularly and there is positive momentum from the ministries of finance; they all want vibrant capital markets.
Indonesia is a country which has subscribed to more capital in CGIF than was allocated to them. Even countries like Cambodia are regularly talking to us, showing what best practices to implement.
Where things go wrong is things like insurance association, asset manager and association guidelines. Even central bank auditors go around giving verdicts on things which would not be in line with overall aspirations.
So, we need a lot more market education. It’s not a question of who is wrong or right, it’s just that we need to coordinate better. Without better coordination things will keep falling through the cracks.
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